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Small Cap Value Report (Fri 21 Oct 2022) - TRI, WIX, ZTF

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Good morning, it’s just Paul here today, as it’s Friday.

CEO interview with David Stirling of  Zotefoams (LON:ZTF)is now live here.  I’ll get cracking typing up a written summary now, should be up here later, early evening probably.   We’ve positively covered this specialist foam manufacturer in the SCVRs seven times this year, with increasing enthusiasm for how the company is successfully passing on inflationary price rises, thus demonstrating its product is in demand. This follows years of heavy capex to revamp its factories in the UK, USA, and Poland.  I reviewed the last good update from ZTF here on 13 Oct 2022 , and I’m also impressed with the balance sheet, plus the shares remain good value. So I invited the CEO to talk to me.

Retail sales data for September 2022 is published today by the ONS. As usual, the press are reporting it wrongly, which they always do, saying that retail sales are down. That is wrong! Volumes of goods sold are down, but the value is actually up. I like this chart below, which explains it better than any words. See how higher inflation has opened up this gap between value, and volume of retail sales. Of course, it’s value, not volume, that matters to us as investors, because the value line is what becomes company revenues.


XP Factory (LON:XPF) [I hold] - I mystery shopped its 2 new Bournemouth sites yesterday afternoon, and am impressed. As it was a rambling amp; photo-filled review, it took up too much space for here, so it’s in a separate post here, for anyone interested.

Trifast (LON:TRI)   [no section below] £89m mkt cap at 65p – this fastenings company dropped 9% yesterday on an H1 (6m to 9/2022) trading update. It’s dropping FY 3/2023 adj PBT guidance from £16.3m to £14.7m, due to increased costs, and delays in negotiating customer price rises. H2 weighting, so interim results may not look great. The balance sheet was already very heavy with inventories amp; receivables, and inventories are said to have risen even more in H1. I think the strong balance sheet can cope with this though. This share is starting to look cheap. So it could be worth you taking a closer look. [no section below]

Wickes (LON:WIX) – a solid Q3 update, with no change to profit guidance of £72-82m for FY 12/2022. This looks a good business, and I also like its strong, ungeared balance sheet. Forecasts have come down a fair bit already, and may come down more. Also there are worries about operating costs amp; higher energy costs when its fix ends in Mar 2023. But overall, taking a longer term view, I think this looks good value. So a thumbs up from me.

Wickes (LON:WIX)

125p (pre market open)

Market cap £323m

Q3 Trading Update

Wickes Group plc (“Wickes”), the market-leading home improvement retailer…

Stable trading in the third quarter; profit guidance unchanged

This looks a solid update for Q3 of FY 12/2022

Key points -

Quarterly like-for-like (LFL) revenues -

Q1: (4.0)%
Q2: 5.4%
Q3: 2.6%

It would be interesting to know the split between price rises, and volumes, but that’s not provided. Remember that, even if sales volumes go down, higher unit prices mean that this can be absorbed by some businesses.

Most importantly, profit guidance is unchanged – specified at £72-82m adj PBT for FY 12/2022. Note below that broker forecasts have already been lowered in recent months, which is good, this is how it’s meant to be done – bring down the guidance when times are hard, then meet the lowered guidance. Rather than forecasts being a straight line sideways, then a profit warning is issued. Watch out for this on this chart below, for every company you look at, it’s a key point at the moment.

I’m also currently looking for companies where 2023 forecasts are below 2022. That makes sense given current uncertainty, and as you can see below, this has been done for WIX forecasts (from 7 brokers, but none publish them on Research Tree for us, annoyingly) -

The question is whether forecast downgrades have been done enough already, or whether further downgrades are required? We don’t know yet.

Other points -

Impact of extreme heat in July amp; Aug, but sales improved in Sept.

Inflation – cost of timber reduced, which has helped moderate selling price rises – very encouraging, and follows on from what I was saying yesterday that there’s increasing evidence inflation might be peaking, and set to reduce in 2023, possibly quite rapidly, which is bullish for shares in due course.

Outlook – the obligatory comment about uncertainty over consumer confidence, but otherwise sounds quite upbeat.

Operating cost inflation is mentioned, in particular energy costs which are estimated to rise by £7.5m in March 2023, based on current energy price cap.

My opinion – this has impressed me. It may only be in line, and forecasts have been trimmed a fair bit, but the valuation is now looking really tempting.

Of course, the question is whether forecasts need to come down some more, e.g. if earnings halve from here, then the PER of 5.9 would double to 11.8 – which is fine in a bad year, then long-term holders would probably see the share price rise, as earnings recover.

Look at the dividend yield too, a thumping 7.8%, although that could be at risk if consumer (and trade) demand really plummets (no sign of it doing so as yet though).

The last balance sheet was very good, ungeared, and strong once you delete the spurious IFRS 16 entries, so there’s no solvency or dilution risk, in my opinion.

At some point, things get so cheap that I think it’s worth buying for the long-term, and just ignoring the short term price. It’s not a binary decision either – I like the strategy of buying in thirds, ie. starting with a ⅓ position size, waiting to see what happens, and then increasing (or decreasing) depending on how things pan out.

At the current valuation, and with its strong ungeared balance sheet, I’m giving WIX a thumbs up, and have added it to my watch list as a possible buy.

The best retailers should weather this storm without too much trouble, and I think this is one of the quality outfits that’s worth considering.

The chart looks as if it’s trying to form a base maybe?



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